Avista Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. Avista is primarily a regulated electric and natural-gas utility operating in the Pacific Northwest and Alaska, with other businesses. Interim financial statements are unaudited and were reviewed by Deloitte; the review is not an audit.
Financial results and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | $297.1 million | $303.3 million | $1,048.1 million | $1,040.4 million |
| Operating income | $31.0 million | $39.6 million | $202.5 million | $207.3 million |
| Net income attributable to Avista shareholders | $4.5 million | $12.2 million | $88.3 million | $97.1 million |
| Diluted EPS | $0.07 | $0.19 | $1.37 | $1.53 |
| Utility gross margin (non-GAAP) | $176.3 million | $172.0 million | $626.3 million | $609.1 million |
Q3 revenue declined despite higher retail electric sales: lower wholesale electric and natural-gas sales, fuel sales, and decoupling adjustments weighed on revenue. For the nine-month period, higher retail utility revenue and improved utility gross margin were more than offset by operating-cost growth, acquisition costs, higher depreciation and interest, and losses in other businesses. Q3 acquisition costs were $6.7 million; nine-month costs were $8.0 million, primarily related to the proposed Hydro One transaction and not passed through to customers. Most are not tax-deductible, contributing to a 53.6% Q3 effective tax rate versus 38.3% a year earlier; the nine-month rates were 36.9% and 36.0%.
For the first nine months, operating cash flow was $307.5 million versus $254.1 million; capital expenditures were $287.9 million, and cash dividends paid were $69.2 million. Cash and cash equivalents were $14.7 million at September 30. Total debt was $1.927 billion, approximately 53.6% of total debt plus shareholder equity. Avista had $161.1 million available under its $400 million credit facility; AEL&P had a separate $25 million facility with no borrowings. The company reported compliance with its credit covenants. Quarterly dividends declared were $0.3575 per share, up from $0.3425.
Material changes and management commentary
- Avista Utilities’ earnings fell in Q3 and year to date, mainly as maintenance, compensation, depreciation and interest costs rose. Idaho and Oregon rate increases, customer growth, and lower electric resource costs partly offset the pressure. Washington general rate increases sought in 2016 were denied, and the 2017 power-cost adjustment filing was dismissed.
- Higher hydroelectric generation and lower wholesale power prices reduced electric resource costs year to date. Management expected a 2017 benefit under Washington’s ERM within its $4 million deadband.
- AEL&P earned $0.4 million in Q3 versus $0.9 million, but $6.0 million year to date versus $4.9 million. Its rate-case settlement resulted in a $0.8 million customer refund liability, expected to be paid in 2018.
- Net losses in other businesses were $3.2 million year to date, compared with $2.2 million, reflecting renovation and compliance costs, equity-investment losses, and corporate costs.
Outlook, regulatory matters and risks
- Hydro One transaction: The July 2017 merger agreement provides for $53.00 cash per Avista share, subject to shareholder and regulatory approvals and other closing conditions. The special shareholder meeting was scheduled for November 21, 2017; closing was expected in the second half of 2018. The parties proposed $31.5 million in customer rate credits over 10 years, subject to possible reduction. Certain termination circumstances carry a $103 million fee. Four shareholder lawsuits sought, among other remedies, to enjoin the transaction; the company said it would defend them.
- Washington rates: Avista requested three-year electric and gas rate increases beginning in May 2018, with the case scheduled for a decision by April 26, 2018. Parties recommended lower revenue requirements than requested. UTC Staff also recommended disallowing Washington’s share of 2016 settled interest-rate swaps. Avista maintained recovery was probable; a disallowance could require write-downs of regulatory assets and an income-statement charge. A separate judicial review of the 2015 rate order could result in a customer refund of up to $9.5 million, net of an amount already accrued.
- Other rate cases: Idaho parties reached a two-year settlement submitted for approval, with proposed electric and gas increases effective in 2018 and 2019. Oregon approved a 2016 gas-rate settlement, including a $0.8 million plant write-off in Q2. An AEL&P rate settlement was filed in October for regulatory approval.
- Funding and investment: A $90 million first-mortgage bond issuance was planned for December 2017 to refinance credit-line borrowing; Avista also expected to issue up to $70 million of common stock in Q4 for capital needs or debt repayment. Management expected a $41.7 million income-tax refund in Q4 and stated available cash flows and credit lines should fund capital spending, dividends, and commitments for the next 12 months. Capital expenditures were focused on generation, transmission, distribution, and aging infrastructure.
- Operational and market exposures: Derivative collateral needs can rise with market prices or a credit downgrade. At September 30, Avista had posted cash collateral and letters of credit for energy and interest-rate derivatives; falling below investment grade could trigger additional collateral demands. Other risks include weather and hydro conditions, commodity prices, regulatory cost recovery, wildfire and other operational events, environmental rules, and cyber risk.
- Resources and environment: Avista’s 2017 integrated resource plan projected slower load growth and delayed the need for new resources from 2020 to 2026; it included storage, solar, demand response, and conservation assumptions. Management stated Colstrip was expected to remain cost-effective, while noting that retirement in 2030 could increase customer bills by about $50 million in the first year. Federal carbon-rule developments remained uncertain.
Most important facts for investors to verify
- Progress and final outcome of Hydro One shareholder, regulatory, and litigation processes, including the $53-per-share consideration and termination-fee provisions.
- Final Washington rate-case decisions, particularly allowed revenue requirements and recovery of interest-rate swap costs; assess possible regulatory-asset impairment and customer refunds.
- Whether planned debt and equity issuances and the expected tax refund occurred, and how they affect liquidity, leverage, and share dilution.
- Drivers of the sharp Q3 earnings decline, including acquisition costs, unrecovered operating expenses, and the elevated effective tax rate.
- Actual capital spending, hydroelectric conditions, collateral requirements, and outcomes of environmental and fish-passage obligations.